Court of Appeal decision means injunction to prevent breach may be more readily obtained where damages limited by contract

The Court of Appeal has held that an interim injunction should be granted to prevent the defendant's alleged breach, on the basis that damages would be an inadequate remedy due to a limitation clause in the relevant contract: AB v CD [2014] EWCA Civ 229. In doing so it has reversed the first instance decision refusing an interim injunction (click here for our post on the High Court decision). 

This decision suggests that the court may be more inclined to grant an injunction preventing a breach of contract where the contract contains a provision excluding or limiting the liability of the contract breaker in the event of a breach.

However, as the court was keen to emphasise, that does not mean an injunction will be granted in all such cases. Where the claimant establishes that damages may not be an adequate remedy that merely "opens the door to the exercise of the court's discretion" as to whether an injunction should be granted. In exercising that discretion, the fact that the restriction in question was agreed, and the likelihood and scale of any shortfall in the claimant's compensation as a result of it, may be relevant. Neil Blake considers the decision below.

	Neil Blake Senior Associate +44 20 7466 2755

Background

The claimant sought an interim injunction to restrain the defendant from terminating a licensing agreement pending the determination of the claimant's claims brought via arbitration proceedings.

The key consideration for the court in exercising its discretion at first instance was whether damages would be an adequate remedy (see American Cyanamid Co v Ethicon Ltd [1975] AC 396). 

The licensing agreement contained a contractual limitation on the heads of loss that would be compensated in damages.  At first instance, Stuart-Smith J refused an injunction, finding that the relevant limitation clause was "part of the price that the Claimant agreed to pay when executing the Licensing Agreement” and, accordingly, it was not unjust to exclude its potential effect when considering whether the claimant should be left to its remedy in damages. (For a more detailed account of the first instance decision, see our earlier  post here.)

Decision

The Court of Appeal allowed the appeal and held that the injunction should be granted.

Among the cases considered at first instance was the Court of Appeal decision in Bath and Northeast Somerset DC v Mowlem PLC [2004] EWCA Civ 115. Bath was concerned with a contract between the claimant council and a contractor, which provided for liquidated damages at £12,000 per week. The Court of Appeal upheld the grant of an injunction on the basis that the liquidated damages clause would have the effect of limiting damages to less than would adequately compensate the claimant council. The Court of Appeal noted that “Mowlem is not entitled to breach its contract” and the agreed liquidated damages figure was not “an agreed price to permit Mowlem to do so” and did not preclude the court granting any other appropriate relief. The court noted the higher level of actual loss that might accrue to the council but for the grant of an injunction and the wider damage to the public interest that might also be caused by delay in the completion of the project concerned (the redevelopment of the Bath Spa).

Giving the leading judgment of the Court of Appeal in the instant case, Underhill LJ held that Bath is binding authority for the proposition that while the agreement of the parties concerning the quantification of damages is conclusive in the context of a claim for damages, it is not conclusive in a claim for an injunction which is designed to avoid any cause to claim such damages.

Underhill LJ stated that not only was Bath binding authority, but was also right in principle (at paragraph 27):

"The primary obligation of a party is to perform the contract. The requirement to pay damages in the event of a breach is a secondary obligation, and an agreement to restrict the recoverability of damages in the event of a breach cannot be treated as an agreement to excuse performance of that primary obligation."

He went on to note that it cannot be just that even in the case of the most gross and cynical breach of contract, if the only losses suffered which would sound in damages are of a type that is contractually excluded, no injunction would lie and the contract-breaker would be entitled to walk away from his obligations with impunity.  Accordingly, "[t]he rule – if “rule” is the right word – that an injunction should not be granted where damages would be an adequate remedy should be applied in a way which reflects the substantial justice of the situation."

The other members of the Court (Ryder and Laws LJJ) agreed with the reasoning of Underhill LJ, with Ryder LJ expressly approving the observation of Sachs LJ in Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 at 379H that the standard question on the grant of an interim injunction might be re-cast as "Is it just in all the circumstances that a [claimant] be confined to his remedy in damages?" 

Comment

At first instance, the High Court drew a distinction between a liquidated damages clause seeking to pre-estimate and compensate the full extent of a party’s losses on breach (as in Bath where an injunction was granted), and a clause stating that certain heads of loss would not be compensated (as in two other cases considered by the court where an injunction was not granted). The former evinces a contractual intention of full compensation, while the latter does not.  The High Court  considered that in cases where the parties had agreed to limit compensation for breach, it would not be unjust to hold them to that agreement and disregard its effects on an application for an injunction. 

However, the Court of Appeal has clarified that this is not a relevant distinction.  The grant of an injunction in both contexts supports the intentions of the parties that their primary obligations of contractual performance should be discharged.